Are services purchased from related entities excluded from tax costs?
On 18.05.2020 the Head of the National Tax Information issued a very important individual interpretation regarding services purchased from related entities in the context of their exclusion from tax costs, referred to in art. 15e sec. 1 of the Corporate Income Tax Act. The company asking the questions indicated that it participates in the cooperation model assuming the existence of entities specialized in a specific area of activity, including production, distribution or support for operational units. According to this structure, one of the central companies of the Group – X GmbH (hereinafter: “Service Provider”) is dedicated to the provision of services supporting entities in the scope of conducting current activities in strategic areas of operation and aimed at ensuring the consistency of operations of the Group entities on a European scale. Operating within the Group, the Company purchases services from a specialized entity, i.e. the Service Provider – an entity related to the Applicant within the meaning of art. 11a sec. 1 point 4 of the CIT Act (and within the meaning of art. 11 of the CIT Act in the wording valid until the end of 2018). The Service Provider is a German tax resident. Consequently, Germany is the country where the cross-border effects related to this request may arise. In this regard, the Applicant has concluded a Management Fee Agreement with the Service Provider. Based on this agreement, the service provider supports the Company, by means of the company’s central departments, in the following areas:
- strategic management
- development of the product offer and marketing
- consultancy regarding the regulatory matters as well as research and development activities
- supply chain and shopping
- legal services
- human resources
- IT support.
The Applicant receives invoices from the Service Provider containing the total value of remuneration for the abovementioned services. IT Services are an exception here, as they can be invoiced separately to the Company.
The Applicant also indicated that the Service Provider’s remuneration is determined for each of the described areas and calculated based on costs of provision of these services – i.e. based on the cost base plus an appropriate profit mark-up (excluding any costs of third parties re-invoiced to the Company).
The costs constituting the basis for determining the Service Provider’s remuneration include, in particular, the costs of remuneration of employees directly involved in the performance of particular types of services, as well as the indirect costs related to the provision of these support services. The cost base excludes general and administrative expenses, described as stewardship costs, which relate to the activities of the Group as a whole and do not bring direct benefits to operating entities using the services.
In the above interpretation the tax authority confirmed, among other things, that the strategic management services, the product offer development and marketing services, the regulatory support and R&D services, as well as the supply chain services and the shopping process services, purchased by the Applicant, are subject to limitation with regard to recognizing tax deductible expenses, referred to in art. 15e sec. 1 of the Corporate Income Tax Act
We recommend that you familiarize yourself with the entire interpretation, which is very extensive and detailed.